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Journal of Economic Integration 2009 December;24(4) :778-805.
Global Crisis and the Integration of India's Stock Market

Sarat Dhal 

Reserve Bank of India
Copyright ©2009 Journal of Economic Integration

Due to growing skepticism over the globalisation process across countries, economists in the emerging market economies (EMEs) are anxious to know how the integration of financial markets was associated with the recent global crisis and whether there could be some key lessons for the broader policy approach to the development of financial market in the future. In this milieu, this study emphasises on a positive perspective on the subject, deriving from the key concerns of the EMEs and the insights from the literature. Financial integration and its association with the global crisis could be construed in terms of the pricing and the re-pricing of risks by the markets. The study derives some crucial insights from the multivariate cointegration analysis of stock price indices for the global markets of the US, the UK and Japan and select regional markets such as Hong Kong, Singapore and India, with a focus on the latter, a leading emerging market economy. These markets shared a single cointegration relationship and the Indian market played the key role. The long-run integration was evident from stock prices measured in US dollar rather than local currencies, attributable to the role of foreign investors and capital flows. The analysis for the full sample and the subsample (excluding the crisis phase) showed that the global crisis could not have been associated with the breakdown of the long-run relationship among the markets. The cointegrated stock markets could contribute to financial stability, since stock prices cannot diverge too far from the long-run equilibrium path. Moreover, the risk pricing perspective on the subject could be useful for the EMEs to continue with the reform measures aimed at further strengthening of the integration process.

JEL Classification: F36, F360, G1, G120, C100, C320

Keywords: international economics | financial integration | financial markets | asset prices | econometrics and statistical models | time series models
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